Another one of your firm’s accurate forecasts was gold’s slide that we certainly have been seeing over the last few months. Will gold fall more? Have we seen a little bit of a rebound over the last week or so?
There is a temporary rebound, but in spite of that, gold is still below $1,500, and it peaked at $1,900 in September 2011. Our forecast, medium term—meaning by 2015—is that gold is going down toward $1,000 an ounce, so from current levels, another 25-30 percent correction could occur. We have written extensively on the reasons for this:
- Tail risks in the global economy are lower than they used to be. The world is not going to end.
- In spite of the QEs, inflation is going to remain low because growth is weak, and therefore all this extra money is going into the reserves of the banks, as velocity is collapsing. If anything, inflation is now falling both in emerging and advanced economies. So buying gold as a hedge against inflation, in spite of all these QEs, is not a good investment.
- There is a global economic recovery. There are now other assets that provide both an income and a capital gain—from equities to even real estate—while gold has always been a play on capital appreciation.
- Real interest rates became very negative in the U.S. and globally. So at current levels, they can only go higher rather than lower because there is a strong relation in gold prices and real interest rates. However, slow as the normalization by the Fed is going to be, eventually there will be one, and the real rates are going to hurt things like gold.
- In a world where other advanced economies are weak and emerging markets are soft, the dollar may tend to appreciate, affecting the dollar prices of commodities, including gold.
Those are some of the factors. There are a couple of other factors as well. The main ones suggest that gold prices may be trending lower rather than higher. It may rise for one week or a month, but it is not going to be a trend. The question is, What is a trend as opposed to short-term volatility?
Do you see any diversification benefits of gold in a portfolio?
The question always with gold has never been black and white on whether you want to have gold in your portfolio. The issue with gold is always, Do you want to be market weight, overweight or underweight? In our view, in the past, there were reasons you wanted to be overweight. But now there are these five reasons to be underweight. It is because the gold prices are more likely to fall rather than rise.